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Saturday, November 22, 2008

Bleak Time Ahead - Year 2009

IF the gut feeling of top executives in this part of the globe is anything to go by, the world economic outlook over the next 12 months appears none too rosy. Significantly, senior executives in the Asia-Pacific region are more pessimistic on this count than their counterparts in North America or Europe.

According to the findings of a study released on Tuesday by Taylor Nelson Sofres (TNS), the market information company, in consultation with Deloitte Consulting, the proportion of senior executives in Asia-Pacific who believe that the `global economic conditions will improve' over the next 12 months has decreased by more than half (51 per cent) between the second and third quarter of 2002. This contrasts with a decrease of 15 per cent in the expectations of the executives in Europe over the same period and an increase of 10 per cent among the executives in North America.

The study involving over 600 CEOs, CFOs and other top executives from leading global companies found that 45 per cent of senior executives in the Asia-Pacific region believed `that global economic conditions would get worse over the next 12 months' compared with just two per cent who had felt this way in the second quarter and 16 per cent in the first quarter of the year.

Executives in Europe did not view the global economic outlook with such a strong degree of pessimism, although 19 per cent of those questioned still felt that conditions would worsen in the next 12 months compared with 11 per cent in the second quarter.

In contrast, just five per cent of the executives in North America anticipated a decline in the global economic climate, down from 10 per cent in the second quarter.

According to Mr John Smurthwaite, Chairman, TNS, Asia Pacific, "The `Global economic confidence barometer' reveals wide fluctuations in attitudes and confidence about the future performance of the world economy at a regional level, as well as across different market sectors. The study also demonstrates how quickly the views of senior business people can adapt to the uncertain conditions of the marketplace and this is particularly evident in these Q3 findings."

Mr Smurthwaite noted "as key influencers in economic growth, the views of those senior executives questioned, as part of the study, collectively represent a potential indicator of how the economy will perform. Building on each successive quarter, the economic confidence barometer provides a unique, progressive and continuous narrative that offers global insight into a highly sensitive and rapidly changing climate."

Coming to specifics, the study revealed that globally, respondents from companies with revenues of less than $1 billion were almost twice as likely to think that global economic conditions will get worse in the next 12 months compared with those from companies with revenues of $3 billion or more.

In addition, the confidence among those from companies with sales below $1 billion showed the most dramatic decline between the second and third quarter with an increase of 19 percentage points in the proportion of businesses predicting that global economic conditions will get worse.

Globally, the most pessimistic business sector was heavy industry with more than a third (37 per cent) of the respondents in the third quarter saying there would be deterioration in the economic climate over the next 12 months. None had agreed with this statement in the first and second quarter.

In contrast, just 12 per cent of the respondents from the financial services sector felt that economic conditions would worsen.

Interestingly, while CEOs and tax directors demonstrated the most significant decline in confidence since the first quarter at the global level, the heads of strategy and CIOs emerged as the most optimistic over the past three quarters.

Business in Asia on Nov 19, 2008. A summary prepared by Asia Pulse (http://www.asiapulse.com), the real-time, Asia-based wire with exclusive news, market intelligence and business opportunities:

AUSTRALIA RISKS SINKING INTO RECESSION IN 2009

SYDNEY - Australia risks sinking into recession early next year after a "very disturbing" slide in expectations for economic growth, a report shows. Westpac chief economist Bill Evans said Australia was likely to dip into recession early next year, even as households benefitted from the federal government's A$10.4 billion (US$6.753 billion) fiscal stimulus package. Interest rates are tipped to fall to historic lows after an index measuring future economic activity showed the biggest monthly drop in more than 20 years. The Westpac-Melbourne Institute leading index, which measures the likely pace of economic activity three to nine months into the future, shrank to just 1.1 per cent in September. The drop from August's 3.5 per cent pace was the biggest monthly fall since the mid-1980s.

PAKISTAN TO INVEST US$13 BLN IN POWER SECTOR TO 2015

KARACHI - About US$13 billion is expected to be invested in the power sector in the years to 2015, said Raja Pervez Ashraf, Pakistan's Federal Minister for Water and Power. The huge investment is expected from the private sector and the government will support the sector in its efforts, the minister told a seminar on Energy Trade in South Asia. "We need to generate this utility in Pakistan, but we should keep in mind that seven to eight years are required for installation of any project," he added.

JAPANESE SHIPBUILDING ORDERS SINK 80% IN OCTOBER

TOKYO - The global economic turmoil has dampened investment enthusiasm at shipping companies, resulting in an 80 per cent year-over-year plunge in October shipbuilding orders in Japan, according to industry data released Tuesday. Speaking at a news conference, Shipbuilders' Association of Japan Chairman Masamoto Tazaki said shipowners are growing cautious about ordering new vessels due to the financial turmoil gripping the globe. Figures compiled by the Japan Ship Exporters' Association show that October shipbuilding orders totaled 290,000 compensated gross tons, a steep drop from 1.61 million in October 2007.

INDIA'S SAIL SETS UP TASK FORCES TO REVIEW STEEL DEMAND

NEW DELHI - Facing twin problems of a dip in demand and prices leading to a glut in almost all categories of products, steel giant SAIL (BSE:500113) has constituted five task forces to review the market and take corrective steps. A delay in decision would lead to piling up of inventories further and the organisation would have no option but to cut production if the slump in demand continues for some more time, government sources said. "As part of their agenda, five task forces comprising directors of SAIL would suggest re-orientation of product-mix to match the supply in tune with the demand of products," sources said, adding this would enable the steel major to design production capacity for various products accordingly.

AUSTRALIA'S MINING, ENERGY INDUSTRIES CONTINUE TO BOOM

CANBERRA - Australia's mining and energy industries continue to boom - but it's too early to tell what impact the global financial crisis might have on the resources sector. Fresh data from the Australian Bureau of Agricultural and Resource Economics (ABARE) shows that exploration in the mining and energy sector had reached record highs in the 2007-08 financial year. The figures show that A$5.5 billion (US$3.59 billion) had been spent scouting for new projects, with petroleum and iron ore the favourite commodities because of high global prices. In the six months to October, US$78 billion worth of projects in the mining and energy sector had been completed or nearly completed. But all that could change with the world economic crisis driving down demand and commodity prices. Karen Schneider, ABARE's acting executive director, said there was a chance some projects would be deferred, modified or cancelled.

INDIA'S MAX NEW YORK LIFE INSURANCE MAY HIRE 44,000 THIS FY

NEW DELHI - India's fourth largest private sector insurer Max New York Life Insurance is mulling hiring around 14,000 employees and 30,000 agents in the current fiscal year, at a time when many global companies are slashing jobs to cut costs amid global recession. Another private sector insurer, MetLife India, had Monday announced hiring about 2,000 managers as well as 30,000 advisors and double its network by March. The decision to hire more people comes at a time when many financial sector giants like Citigroup and American Express have announced extensive plans to reduce their workforces.

INDIA'S PARSVNATH FORMS INFRASTRUCTURE JV WITH SPAIN'S SAN JOSE

MUMBAI - Indian realty firm Parsvnath Developers (BSE:532780) has announced a joint venture with Spanish company Constructora San Jose to bid for infrastructure development projects. Constructora San Jose is a subsidiary of Spain-based infrastructure development firm Grupo San Jose. In a filing to the Bombay Stock Exchange Tuesday, Parsvnath said the consortium has qualified to submit financial bid for the construction of an elevated expressway on national highway NH-4, with the contract valued at Rs 12,200 million (US$247 million).

INDIA TO HELP NEPAL SET UP POWER TRADING ENTITY

NEW DELHI - India has entered into an agreement with Nepal to help it set up a power trading entity, which the Himalayan nation has asked for to be able to export power, on the lines of Power Trading Corporation of India. "India will have a 30 per cent equity stake while the rest will be owned by Nepal," Minister of State for Power Jairam Ramesh said here. Ramesh and Nepalese Water Resources and Power Minister Bishnu Paudel had met here last week to discuss various issues of mutual interest. Ramesh said by setting up an electricity regulator, Nepal wants to introduce competition in the power sector and boost the confidence of investors.

THAILAND'S RICE, CHICKEN EXPORTS TO DECLINE IN 2009

BANGKOK - Thailand's exports of rice and chicken are expected to be gloomy in 2009 due to the ongoing global economic slowdown and uncompetitive prices of Thai rice, industrial experts said Tuesday. Chookiat Ophaswongse, president of Thai Rice Exporters Association, said rice export trends for next year are not promising because Thailand's domestic rice prices had risen sharply in 2008 while a number of countries had encouraged more rice farming for their own consumption, while rice exporting countries also are growing more rice. Meanwhile Dr Anan Sirimongkolkasem, president of the Thai Broiler Processing Exporters Association, said chicken exports in 2009 are likely to decline because key importers -- including the US, Europe and Japan -- are suffering from economic slowdown.

INDONESIA'S KADIN SEES BLEAK PROSPECTS FOR 09 OIL INVESTMENT

JAKARTA - The prospects for oil and gas investment in Indonesia in 2009 look bleak due to the global financial crisis which is expected to reach its peak next year, an Indonesian Chamber of Commerce and Industry (Kadin) executive said. "For 2009 not much can be expected from the oil and gas sector because the global crisis is expected to reach its peak next year," Kadin vice chairman for energy and mineral resources Dito Ganinduto said here on Tuesday. But he predicted the investment climate in the oil and gas sector would improve in 2010.

MALAYSIA - Bleak Times Ahead

YES, we are staring at the gathering clouds of an economic crisis. Sure, economic fundamentals are strong, as government ministers keep saying, but that’s only half the picture.

The other half is the financial scenario, as economic and financial principles are two different things. The sub-prime crisis that began in the US and western countries is essentially a financial problem. But in an interdependent world, a financial crisis in one place could result in an economic crisis in another.To illustrate, if US consumers buy fewer cars from say, Japan, Japan slows production and therefore imports less steel and rubber from say, Malaysia. Faced with low demand, Malaysian factories may be forced to downsize by cutting wages or workforce. That would be the worst-case scenario. Which begs the question: how well is Malaysia positioned to face an “imported” crisis we had no hand in starting?

No new revenue

To a panel of experts at The Global Financial Crisis and Implications on Malaysia forum on 12 Nov 2008 at Universiti Malaya, Malaysia is taking a practical, albeit predictable, approach by spending its way out of a crisis.

It is typical of most governments to respond to a crisis by injecting funds to keep the wheels of market and business turning.

Yet, the experts at the Centre for Public Policy Studies-organised forum also wondered, where was the money going to come from?

Already, the government has revised the national deficit for 2009 to 4.8%, up from the originally projected 3.6%.

Malaysia has had a budget deficit for the last 11 years. With earnings from commodities like crude oil and palm oil falling, the question is whether there will be enough money to pump-prime the economy.

The RM7 billion package announced by Deputy Prime Minister and Finance Minister Datuk Seri Najib Razak on 4 Nov is not new money. It is sourced from the savings made from reducing fuel subsidies following the drop in oil prices.But while low oil prices may mean lesser government subsidies, hence more money in the government’s coffers, it also means less revenue because Malaysia is a net oil-exporting country. Indeed, national oil company Petronas contributes over 40% to government coffers.

“There will be less revenue overall for the government next year from petroleum, palm oil and taxes as profitability drops. How will we continue pump-priming the economy with falling revenue?” said DAP economic adviser Teh Chi-Chang.

“The government may know the right thing to do, but do they have the means to do it?” added Datuk Dr R Thillainathan, who has sat on several high-level government advisory panels. These include the National Economic Consultative Council II (Mapen II), and the Anti-Recession Task Force during the 1980’s economic crisis.

The government plans to raise funds by monetising its assets, through tendering out federal land in the Klang Valley for redevelopment. But this might be too little to face the fuller impact of the oncoming crisis, and too late when the benefits are finally reaped.

“You won’t get a good price now if you tender out land in this climate. Also, it will take time before the development is finished and the returns can be enjoyed. Turning land assets into cash is also akin to spending money saved for future generations,” Teh argued.

The RM7bil package

It’s too late to look for alternative sources of new revenue if the crisis is to hit next year. As such, the next best thing is to ensure that whatever funds available are spent wisely. Money can also be saved by plugging leaks and fighting corruption among the “big fish”, panellists noted.

Which leads to concerns whether the RM7 billion package will reach the intended target groups. Some of the panellists worried that without transparency, corruption and leaks will result in the bulk of the package benefiting only a few.

Teh reckoned that the package’s most viable part is the RM3 billion that cumulatively will go towards reviving abandoned housing; and building more low- and medium-cost houses, minor public infrastructure projects like village roads, bridges and community halls, and public amenities like schools, hospitals and roads, including roads in rural Sabah and Sarawak.

These are projects that would benefit the rakyat directly, and provide economic activity for small contractors. But what about small and medium enterprises (SMEs) which comprise 95% of all Malaysian businesses and employ 54% of the workforce?Despite RM200 million under the package going to micro-credit schemes for SMEs, Universiti Malaya Business and Accountancy Faculty adjunct professor Dr Sieh Lee Mei Ling worries that not all SMEs will benefit.

“We have close to one million SMEs in the country but according to government records, only some 7,000 are registered. Will aid reach those who are most needy?” said Dr Sieh, who is also advisor on services for the Malaysian Industrial Development Authority (Mida).

Datuk Syed Amin Aljeffri, president of the Kuala Lumpur Malay Chamber of Commerce, added that SMEs still face regulatory problems, such as difficulties in securing bank loans because government policy dictates other sectors as priority for banks.Ultimately, the issue is how best to utilise limited funds. Citizens should press the government for accountability, says Universiti Kebangsaan Malaysia Institute of Ethnic Studies fellow Datuk Dr Denison Jayasooria.

“There must be more rigorous accountability through Parliament. It should be more than one hour for the question-and-answer session in the Dewan Rakyat. Select parliamentary committees should be formed to monitor the implementing ministries,” he said. How deep a hole?

The statistics do show that Malaysia has good economic fundamentals: a low rate of non-performing loans, high foreign reserves of US$100.2 billion that can cover eight months of imports, low external debt, enough cash in the system, loan growth at 9.5%, and inflation projected at between 3% and 4% next year.

But the point for Thillainathan is, nobody knows just how deep a hole we are about to fall into. Even the affected countries in the west are unclear as to the period and depth of their economic downturn. The collapse of the auto industry in the US appears to be just beginning. And in Malaysia, the long-overdue West Coast highway project has been deferred for the second time.

“What if the recession is long and deep? If we try to spend our way out, for how long can we spend?” asked Thillainathan. He called on the government to work out “best-case and worst-case scenarios” for the economy against different levels of commodity prices.

Syed Amin also felt that the banking sector, still resilient for now, will eventually be affected as businesses face difficulties in repaying loans. Sieh of Mida cautioned that non-performing loans might increase.

Waiting it out: Press government for accountability in the RM7 billion packageThose most vulnerable to a downturn will be the lower and lower-middle income groups, said Denison. The first group includes those who hold jobs in the manufacturing sector with multi-national companies, or with export-oriented businesses like textiles or furniture-making. These sectors and MNCs could be severely affected by a slowdown.

The lower-middle income group would include young couples with children or new families, who are likely juggling housing and car loans with everyday expenses.The panel’s best advice for the average Malaysian is to buckle up and hunker down to wait out the downturn, which could last for at least the next one to two years, according to experts.

“Spend, don’t stinge, but spend only on what’s necessary. And use this time to retrain yourself by learning new skills,” advised Sieh.Denison noted that social problems caused by unemployment, including a higher crime rate, haven’t even been addressed yet.

So, the outlook is bleak, probably more so than we thought after the cheer generated by the government’s RM7 billion package. But the sooner we take stock of the realities ahead, the better our chances of surviving the months ahead.

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